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The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand. (This is a difficult question. If you do not have the answer, pls try your best guess, considering also going by elimination. Hint: Draw two LM curves with different slopes, one flatter and one steeper, and then compare the interest rate change for a given IS shift at the initial income level and the income change for the same IS shift at the initial interest rate level). a. greater; greater b. greater; smaller c. smaller; smaller d. smaller; greater

Sagot :

The correct option is,  (d) smaller, greater.

  • The LM curve is steeper the smaller the interest sensitivity of money demand and the greater the effect of income on money demand.

What does a steeper LM curve mean?

  • The LM curve will be steeper if the income-elasticity of the demand for money is higher and the interest-elasticity is lower.
  • The LM curve is virtually vertical when the demand for money is generally indifferent to the interest rate.

What causes the LM curve to shift?

  • The LM curve shifts right as a result of monetary stimulation, or boosting the money supply, leading to higher output and lower interest rates.
  • The IS curve is shifted to the right by fiscal stimulus, or boosting government spending and/or lowering taxes, which raises interest rates while driving up output.

What is income sensitivity of money demand?

  • The greater the interest rate, as the minus sign suggests, the more likely people are to invest their money rather than have it available for consumption.
  • The income sensitivity of real money demand and the interest sensitivity of real money demand are the two variables that are regulated by sensitivity coefficients.

Learn more about LM curve here:

https://brainly.com/question/26430220

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